LONDON (Reuters) – For now, Britain is still the key to seeing whether a calmer mood can dominate markets wary of turmoil in the United Kingdom that has fueled broader concerns about financial stability.
Traders are back on the lookout for intervention in the Japanese yen, while earnings season kicks off in the US and the ruling Communist Party congress in China.
Here’s a look at next week’s markets from Kevin Buckland in Tokyo, Louis Krauskopf in New York, and Tommy Wilkes and Dara Ranasinghe in London. Vincent Flasser drawings.
1/ Another resort buyer
The Bank of England is no longer the buyer of last resort for battered British bonds
The government’s “mini-budget” on September 23 triggered some of the biggest jumps ever in UK bond yields, sparked fears in broader markets and sparked a crisis among pension funds that need to find ample amounts of cash.
The Bank of England has had to intervene frequently to ensure financial stability, even as these measures run counter to its mission to combat inflation by raising interest rates and selling some of its bonds.
The pension industry has warned that schemes are not ready to end bond buying.
Kwasi Quarting was dismissed as finance minister on Friday. Now, Britain’s new finance minister, Jeremy Hunt, said he will announce tax and spending measures on Monday, two weeks earlier than scheduled, as he tries to stem the loss of confidence in the government’s fiscal plans.
(UK government bond yields are rising UK government bond yields https://graphics.reuters.com/GLOBAL-THEMES/lbvgnqdxapq/chart.png)
2/ Pressure test
On top of the turmoil in the UK, anxiety caused by decades of high inflation, an energy shock and skyrocketing global interest rates are putting markets to a stress test.
The massacre in British bonds exposed weaknesses in the pension sector, and highlighted financial stability risks. Therefore, the coming days will see increased focus on other potential hotspots that have come under the radar of regulators.
The IMF warns of “disorderly re-pricing of assets” and “contagion of financial markets”. Asset manager PIMCO believes the UK is unlikely to be the only source of instability, adding that private loan and credit markets may also face pressure.
(US fixed income market volatility https://graphics.reuters.com/GLOBAL-MARKETS/mypmndrzzvr/NkKjm-us-fixed-income-market-volatility.png)
3/ Earnings of the season
Earnings season in the US in the third quarter heated up as companies reported results in a tough operating environment due to a strong dollar and rising inflation.
Overall corporate earnings are expected to rise 4.1% compared to the same period a year earlier, the slowest growth since the fourth quarter of 2020.
But there may be more focus on how CEOs envision the future; Analysts estimate a roughly 8% rise in profit next year, according to Refinitiv IBES, but many investors are skeptical of that forecast as recession risks loom.
The slide in the market has moderated stock valuations, but lowering earnings expectations could weaken the stock’s attractiveness. Upcoming earnings reports include results from Tesla (NASDAQ :), Netflix (NASDAQ :), and Johnson & Johnson (NYSE:).
(Frightening US Earning Season https://graphics.reuters.com/GLOBAL-MARKET/zgpomqdxnpd/chart.png)
4 / Not the economy, my friend
China’s twice-decade congress kicked off on Sunday, and the week-long closed congress is set to give Xi Jinping an unprecedented third five-year term as supreme leader.
It puts Xi in a position to pursue his vision of “the rejuvenation of the Chinese nation,” which includes “common prosperity” policies that have toppled giants including Ali Baba (NYSE:) and Evergrande. The desire to bring Taiwan under Beijing’s control is escalating tensions with Washington.
Xi called at the weekend for accelerating the building of a world-class army while promoting the fight against COVID-19.
As for the economy, Xi has let that fall victim to other priorities: Growth is set to miss the 5.5% target after repeated shutdowns under the Zero COVID program. The latest GDP reading is due on Tuesday, after real growth stalled in the second quarter.
Hopes for an easing of epidemic controls at this conference may turn out to be unfounded, considering how Beijing faced an escalation of cases just before that by preventing many travelers on the last Golden Week holiday from returning to the capital.
(China’s tepid economic growth https://graphics.reuters.com/GLOBAL-MARKETS/xmpjozwqzvr/chart.png)
5 / hour intervention
Traders are back on the lookout for currency intervention as the dollar climbed to a 24-year high against the yen and returned to multi-year highs against the Korean won.
The Japanese currency drifted to the cusp of 147 against the dollar on Wednesday, crashing through the bottom at 145.89 that prompted the Bank of Japan to intervene last month to support the yen for the first time since 1998.
South Korea also sold billions of dollars in the last quarter to prop up its currency, with the won dropping to a 13-year low of 1,445 against the dollar last month. However, it hasn’t strayed far from there, coming close to 1440 last week.
China’s state banks stepped up their intervention to defend the weak yuan on Monday. Traders are wary of taking more serious steps in the future.
There was no sign from the Group of Seven economies meeting in Washington for a joint intervention to ease the pain of the dollar’s rise.
(Japan’s history of yen support https://graphics.reuters.com/GLOBAL-MARKETS/jnpweqoqxpw/tLg3Z-japan-s-history-of-supporting-yen.png)